External Accounts Are Balancing

The ex-factory price index of industrial products was up 4.3% y/y in January, down 1.6 pps from Q4 2017. PPI was up 5.2% y/y, down 1.9 pps. Given tightening monetary policy, we expect producer prices will continue their downward trend in 2018. Due to the Spring Festival – the Chinese New Year -- many statistics are still unavailable. We can only analyze data from imports and exports, and on financial conditions and price levels. CPI was up 1.5% y/y in January or 2% y/y after correcting for the Spring Festival factor, slightly higher than in Q4. Similarly, with tightening monetary policy, a CPI increase at this high rate of 2% is not sustainable. Trade growth is within normal range, after adjusting for the holiday factor. Imports were up 36.9% y/y. This very high growth rate was instantly adjusted for the holiday effect to 13.2% y/y, in a normal range instead. Exports were up 9.7% y/y after the holiday adjustment, up 0.5 pps from last December. The M1 money supply was up 15% y/y at the end of January. Considering that the holidays came late this year, the adjusted M1 growth rate was even lower than in December. The general declining trend has not changed. M2 money supply was up 8.6% y/y, lower than almost all months in 2017. RMB loans from financial institutions were up 13.2% y/y. Savings deposits from non-financial enterprises were up 12.1% y/y. These two relatively high growth rates were the main ones affected by the holiday. In January, the societal financing scale fell -17.2% y/y. In particular, the increase outside of RMB loans fell -74% y/y, with a share of only 12.1%. These are immediate outcomes of recent financial regulation tightening, and of de-leveraging efforts.

Although China’s stock market has been hit by the recent huge volatility in the U.S. markets, China’s capital account seems to be shifting into balance. All of China’s external accounts turned to surplus in 2017, including the much worried-over FX reserve, adding $91.5 billion, from a $475.2 billion fall in 2016. The outside market is volatile, but Chinese growth is strong. The Chinese government is taking major steps to tackle any potential financial market disruption factors, as analyzed in detail in our recent reports. Based on these three factors, we expect in 2018 that the RMB-U.S. dollar exchange rate will be basically stable, that the capital account surplus will rise, and that foreign reserves will grow.